This picture taken in April shows extension works underway at the Tien Sa Port in the central coastal city of Da Nang. The Ministry of Finance has announced a plan to boost public spending in the second half of the year. Photo: AFP

The Ministry of Finance has announced a plan to step up public spending in the second half of the year. Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Program in Vietnam, says that although the urge to bolster economic growth is understandable, the move could fuel inflation and erode public confidence.

Vietweek: Why did the government decide to accelerate funding disbursement for public investment?

Vu Thanh Tu Anh: I think the government has been under pressure to speed up economic growth. The economy expanded only 4 percent in the first quarter and less than 4.4 percent in the first half of the year, so there seems to be some anxiety about economic growth. Then, amid all this, the prospects for major growth drivers like consumption and private investment are not really positive for the remaining months, so maybe that's why the government decided to boost public investment.

The average disbursement for public investment projects was only VND13 trillion (US$624 million) per month in the first half of the year, which gave the government even more motivation to accelerate funding in the second half. The plan is to disburse a total of VND130 trillion, or around VND21 trillion every month, from now to the end of the year. That's 50 percent higher than the monthly average we saw earlier. We can say that the lid on spending has been lifted.

But should this be a concern considering that public money has not been used very effectively and the central government has given provincial authorities and state enterprises more freedom in using state funds?

Of course it's dangerous if people adopt the "spend first, check later" approach and use "urgency" as an excuse to not follow standard procedures for public investment. We all know that there have been losses and wasteful spending. So now, under this kind of time pressure, it's hard to say for sure that the plan for ramped-up spending will be implemented effectively.

Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Program in Vietnam

What's more important is that the government has already sent the message that it will restructure three main areas the banking sector, state-owned enterprises and public investment.

For public investment, the goal is to focus only on the most important projects to achieve the best results. But with the new plan to boost spending, the government seems to be going against this goal. In other words, it is sacrificing the long-term goal for short-term results.

Will there be any harm caused by this policy shift?

There will be critical damage to public confidence. Half a year has passed since banking reforms began, but businesses are still hungry for loans, interest rates are still high, banks can't give out more loans, and bad debts remain the same. Then reformation of SOEs is not making any progress either. And now public spending is no longer as controlled.

That means all three areas of reform have failed to yield results so far, with the new public investment policy even going against the government's original intentions. This could create doubt and undermine confidence in major government policies.

If a large sum of money is pumped into the economy in a short period of time like this, will it fuel inflation?

If public investment is accelerated without any restriction and credit is expanded at a fast pace to meet the annual growth target of 12-13 percent at all costs, there will be consequences in 2013.

Injecting a large amount of capital into the economy via public investment and credit can release the same old cycle of high inflation and instabilities that Vietnam has faced over the years. There is always tightening at the beginning of the year, then loosening in the middle of the year, and then next year it is tightening again. That is not the right way to go if we want to create a foundation for a stable economy.

So what is your advice?

People usually think about fiscal policy, particularly increasing spending, when the economy slows down. But there is actually another way, which is stimulating consumption and private investment.

On the monetary side, it's necessary to deal with bad debt first and foremost to allow credit to flow normally.

In terms of fiscal policy, instead of trying to collect more money only to increase spending, the government should accept smaller tax revenues to ease the burden on businesses and consumers. In particular taxes that have strong effects on the economy such as corporate income tax or value-added tax should be waived, reduced or extended. This money, rather than flowing to the government budget, can stay with businesses and consumers and will then be used for investment and spending. The investment will go straight into the economy without any policy lag and, of course, it will not put the private sector at a disadvantage.

I think this is also what the public wants. Businesses and consumers will prefer having tax breaks to paying taxes without knowing for sure if the money will be used effectively.

But do you think we can't deny the fact that Vietnam can't do without public investment?

That's true. Cutting back on spending and tax collection doesn't mean we put an end to public investment. But right now, Vietnam should focus on investing in infrastructure, especially in projects about to be completed, instead of launching new projects"¦

Second, agriculture and rural areas are the foundation of the Vietnamese society but they have not received due attention and they are vulnerable. They used to receive 13 percent of the total public investment 10 years ago but the ratio has fallen to 6 percent now. So we need to adjust our investment priority.

Third, there must be social welfare investment for education, healthcare and insurance to support the poor. Even a penny for poor people during tough times can bring great economic and social benefits.